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Wednesday, March 21, 2012

the bath water, the baby and SLB

SLB has been acting as a money pit as of late. Every time there seems to be a push higher, something drags it down.

Back in early March SLB took, what I thought to be an unmerited hit in sympathy with industrials due to Brazil. Two days ago, SLB seemed like it was going to break from its pullback and push toward high 70s, low 80s.

 Yesterday seemed like a normal push back from its attempt to push higher, facilitated by a decline in oil (the commodity).  Today, Baker Huges (BHI) issues a warning on its profit margins. In sympathy, the sector is in decline.

Okay, I get the sentiment, but is a uniform decline really merited?

BHI has about 50% of its revenue coming from North America, and a lot of that comes from Nat Gas. Obviously with US Natural Gas at record low prices, and oversupply, there is an obvious reason for under performance. Everyone knew nat gas production was going to be cut, which would affect natural gas heavy servicers.

On the flip side, SLB has about 33% of its revenue coming from North America and a bunch of that is related to liquids and off shore drilling.  The rest of the 67% of its revenue is specific to areas of the world where natural gas prices are north of $13-16/btus and with Crude well north of $100 for WTI and Brent. With these conditions in place, I scratch my head wondering why SLB is being taken down in sympathy with BHI (a known under performer).

I know there were concerns about profit margins, and that concern is across the entire sector, but with the macro fundamental back drop (especially globally and higher WTI oil price for the US) SLB seems very well positioned to continue to benefit.

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